Indian banks will now have more cash to lend for more reasons than one

  • Public sector banks will be given ₹70,000 crore capital to boost credit growth in the country.
  • Government will start raising a part of its borrowings in external markets.
  • One-time six month partial guarantee will be given for loans to high-rated pooled assets of financially sound NBFCs amount to ₹1,00,000 crore.
The Finance Minister today gave a shot in the arm for public sector banks. They will be given ₹70,000 crore capital to boost credit growth in the country, which has been slow for the last few years.

Added to that, the government will take some of its own loans away from Indian banks. The country’s biggest borrower is the government and banks love to lend them because of security. Now, this will change as the government will raise money internationally.

“India’s sovereign external debt to GDP is among the lowest globally at less than 5%. The Government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have a beneficial impact on demand situation for the government securities in the domestic market,” the Finance Minister Nirmala Sitharaman said in the Budget speech on Friday.


Gains from ‘Cleaning’

The stress in the banking sector and overall liquidity has been eased by other measures as well. The Finance Minister also said that the banking system has gained from ‘cleaning’ of the system.

"NPAs of commercial banks have reduced by over ₹1,00,000 crore over the last year, record recovery of over ₹4,00,000 crore due to Insolvency and Bankruptcy Code and other measures has been affected over the last four years,” said Sitharaman.


Helping NBFCs

She also directed banks to not turn unduly risk averse of lending to non-banking financial companies (NBFCs). Banks have steering clear of any lending to them after IL&FS defaulted on payments to them, dragging down as many as eight banks with them. Ever since, the funding pipe for NBFCs has died up.

“NBFCs are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment,” she said.

The government is also walking the talk. It will provide a one-time six month partial guarantee to public sector banks (PSBs) for the first loss of up to 10%, for high-rated pooled assets of financially sound NBFCs amount to ₹1,00,000 crore.

“Since the liquidity crisis, the banks have become more conservative and were wary of lending to NBFCs or providing interest rate reductions. Enhancing credit guarantee for portfolio purchases will definitely improve the flow of funds to healthy NBFCs with a good quality asset pool,” said Hardika Shah, Founder of Kinara Capital.

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